Companies say they would use repatriated earnings to buy back stock

President Trump has been outspoken on the importance of keeping US corporate profits in the US. Furthermore, he has advocated for the “repatriation” of corporate profits earned overseas.

But while the latest tax reform proposal aims to end “the perverse incentive to keep foreign profits offshore,” the White House ultimately has limited influence on how repatriated profits is deployed. Will companies use that money to raise wages, finance expansion projects, and invest in R&D? Or will they use it for arguably less productive matters like acquiring companies, pairing down debt, paying out dividends, and buying back stock?

A survey conducted by BofA Merrill Lynch showed that companies are most interested in taking repatriated earnings and using it to pay down debt and buy back shares. Capital expenditures, considered a direct form of growth-inducing investment, was further down on the list.

Using cash for buybacks—which inflates earnings per share—instead of business investment has been seen as unproductive by many analysts. Just this week, even Ralph Nader blasted corporate buybacks as ineffective, calling out General Electric (GE) and IBM (IBM) specifically for mishandling cash.

The money in question isn’t chump change. US companies generate about 43% of sales abroad with overseas earnings totaling $2.5 trillion, according to Goldman Sachs. This includes $920 billion of untaxed overseas cash. Goldman estimates companies would bring back about 25% of cash, or around $250 billion, back to the US.

Stock prices are high and overseas cash is held by growth companies

Despite the survey and the 2004 example, it is still unclear what companies will do with their cash.

In fact, Goldman Sachs sees two reasons why a repatriation tax holiday won’t be used primarily for buybacks.

“High equity prices and recent cash spending patterns of firms with taxable overseas cash suggest that companies would be less likely to favor buybacks over other uses of cash in 2018,” according to Goldman’s Arjun Menon.

And the sectors with the most overseas cash are in growth areas with investment opportunities. As shown in the chart below, Information Technology ($633 billion) and Health Care ($151 billion) together account for 85% of total S&P untaxed overseas cash.

Ultimately, the outcome remains unclear. Apple (AAPL) has borrowed money to fund corporate buybacks and dividends, even as it grows.

And just on Tuesday, Walmart (WMT) was rewarded for announcing a large buyback program, even as it invests in online growth, which reflects continued interest in this use of cash from corporations.